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Financial regime change?

Say goodbye to the neoliberal paradigm that has held sway since the 1980s.

Dr Robert Wadeby Robert Wade, New Left Review

Since the 1930s the non-communist world has experienced two shifts in international economic norms and rules substantial enough to be called 'regime changes'. They were separated by an interval of roughly thirty years: the first regime, characterized by Keynesianism and governed by the international Bretton Woods arrangements, lasted from about 1945 to 1975; the second began after the breakdown of Bretton Woods, and prevailed until the First World debt crisis of 2007-08. This latter regime, known variously as neoliberalism, the Washington Consensus or the globalization consensus, centred on the notion that all governments should liberalize, privatize, deregulate — prescriptions that have been so dominant at the level of global economic policy as to constitute, in John Stuart Mill's phrase, 'the deep slumber of a decided opinion'.

The two regimes differed in the role allotted to the state, in both developed and developing countries. The Bretton Woods regime favoured 'embedded liberalism', as it was later called, which sanctioned market allocation in much of the economy but constrained it within limits set through a political process. The successor neoliberal regime, particularly associated with Reagan and Thatcher, moved back towards the norms of laissez-faire embraced by classical liberalism, and hence prescribed a roll-back of state 'intervention' and an expansion of market allocation in economic life. But it gave more emphasis than classical liberalism to the idea that competition is not the 'natural' state of affairs, and that the market can produce sub-optimal results wherever producers have monopoly power (as in Adam Smith's observation that 'people of the same trade seldom meet together [without concocting] a conspiracy against the public').

Neoliberalism accordingly sanctioned state intervention not only to supply a range of public goods that could not be provided through competitive profit-seeking (as did classical liberalism), but also to frame and enforce rules of competition, overriding private interests in order to do so; hence the 'neo'. Its principal yardstick for judging business success was shareholder value, and its central notion of the national economic interest was efficiency as determined by competition in an economy fully open to world markets; there should be no 'artificial' barriers between national and world market prices, such as tariffs or subsidies to particular industries. Of course, at the level of policy, many tactical, pragmatic modifications were made to these principles, in order to subsidize corporations, channel more wealth to the rich, and stabilize the economy and society with covertly Keynesian policies. But at the level of norms, the difference was clear.

In the realm of finance, neoliberal prescriptions were justified by the 'efficient markets hypothesis', which claimed that market prices convey all relevant information and that markets clear continuously — rendering sustained disequilibria, such as bubbles, unlikely; and making policy action to stop them inadvisable, since this would constitute 'financial repression'. Milton Friedman and the Chicago School gave their name to this theory; but as Paul Samuelson said, 'Chicago is not a place, it is a state of mind', and it came to prevail in finance ministries, central banks and university economics departments around the non-communist world.

The shocks of the past year — another thirty years on from the last major shift — support the conjecture that we are witnessing a third regime change, propelled by a wholesale loss of confidence in the Anglo-American model of transactions-oriented capitalism and the neoliberal economics that legitimized it (and by the US's loss of moral authority, now at rock bottom in much of the world). . .

To read further . . .

Links and sources
  Financial Regime Change? by Robert Wade, New Left Review, September-October 2008

Posted: November 10, 2008

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